The rules are different for bank-issued prepaid debit cards, or "open-loop" cards with an American Express, Discover, MasterCard or Visa logo. When the issuing bank fails, whether or not the gift card is covered by deposit insurance makes all the difference.
Bank-issued gift cards can have third-party distributors -- retail stores that have gift card kiosks, such as drugstores -- which makes deposit insurance coverage less than straightforward. "Depending on how the account is structured, we might recognize the retail store as the insured depositor or we might recognize the various cardholders as the depositors," says Christopher Hencke, staff attorney at the Federal Deposit Insurance Corp.
The store would only receive coverage for up to $250,000, but if the cardholders were insured, they would each be covered for up to $250,000, in combination with any other accounts they had at that financial institution.
Check the gift card agreement to see if it states whether the card has deposit insurance. Hencke says if it offers no explanation, "and you haven't been asked to send a form to a bank explaining who you are and your identity, you can pretty much assume you're not going to be insured by the FDIC -- you personally." The FDIC must have records of who the cardholders are and how much they are owed.
He advises trying to use the card first. Even if the FDIC only insures the retailer that sold the card, the company may have enough funds at the bank to clear some transactions. If the card fails to work, contact the financial institution that issued the card. If you can't tell who that is by looking at the card, do an Internet search using the name of that gift card. Contact the issuer to see if you have any recourse.
What to do
When the headlines about a gift card issuer suggest it is struggling, don't wait to redeem the card. "Spend it, preferably before they file, because once you have the goods in your hands, it's done," says Hughes.
If you bought a now-worthless gift card for someone else and purchased it with a credit card, you may be able to get a refund through your credit card issuer, thanks to the Fair Credit Billing Act.
Check with the store or financial institution that issued the card first if you have trouble redeeming a card.
To file a complaint about a gift card issuer, contact the appropriate regulator. Report problems with retailer-issued cards to the Federal Trade Commission. For bank-issued cards, check the Federal Reserve's handy overview of agencies that oversee financial institutions.